1. Should we devolve taxes to councils? Not yet.

Councils are restricted by older property owning voters from borrowing to build infrastructure. They want increased taxing powers that Wellington won't give up. Photo by Lynn Grieveson.

Councils want the power to collect or receive GST and income taxes so they can pay for expensive infrastructure needed for population and tourism growth. Bernard Hickey argues they would need to improve their governance and accountability first.

Local Government New Zealand has launched its own funding inquiry in tandem with one the Government is setting up through the Productivity Commission. They will both ask if councils should be given tax revenues or the power to tax to fund expensive local infrastructure.

Ahead of the launch of the full terms of reference for a local government funding inquiry, councils have launched their own inquiry aimed at devolving power and funding to them.

Local Government New Zealand and The New Zealand Initiative jointly launched their Localism project at the LGNZ annual conference on Sunday evening. They called for devolution and decentralisation in the way New Zealand was run and detailed a schedule for the release of a discussion paper, accepting submissions and preparing a final report for March 2020.

The joint statement said decentralisation of services would be accompanied by "financial resources commensurate with the cost of providing those services."

The problem for LGNZ in trying to revive this debate is that surveys show voters trust local government significantly less than central Government and are much less engaged through the democratic process of voting.

Changes to an Australian-style system where GST is shared with councils or where income taxes are also shared have been rejected many times before, especially given central Government would have to elect to give up the income raising and spending powers.

'A decade after Shand'

The coalition agreement between Labour and New Zealand First in late October included an agreement to hold a public inquiry “A decade after Shand” to 'investigate the drivers of local government costs and its revenue base.' The Government quietly announced a week before the May 17 budget that the Productivity Commission would conduct an inquiry into local government funding, but it has yet to receive the full terms of reference for the inquiry. Finance Minister Grant Robertson re-announced the inquiry on Sunday.

Not surprisingly, Governments of both colours have been very reluctant to give up both the power to tax incomes and spending, or to hand over those revenues.

This Government is also being cautious, despite the coalition agreement.

Robertson spoke at the LGNZ conference on Sunday, announcing the terms of reference would include investigating the drivers of local authority cost pressures and "provide recommendations for how councils can maintain and deliver services and infrastructure in cost-effective ways into the future."

"The pressures faced by local councils vary significantly, whether it’s the provision of infrastructure due to growing resident populations, or provision of tourism infrastructure against decreasing rating bases," Robertson said.

“The scale of this issue means an in-depth look is needed into whether our current structures are fit for purpose, and to identify how central Government can help by cutting red tape, improving regulation and taking pressure off local government," he said.

'Look off balance sheet'

Robertson spoke mostly in his speech about finding other ways for councils to fund infrastructure, in particular creating off-balance sheet vehicles that could charge new residents extra for services.

He did not talk about sharing GST or income taxes, which are currently the main ways Government reaps the benefit of population growth. Councils, instead, have to wait for rates on capital values to catch up with population growth when much of the infrastructure needed for that growth is 'front loaded'. Many ratepayers are also asset rich but cash poor, meaning they are reluctant and unable to fund rates increases.

That effectively means councils must take on debt to fund infrastructure, but voters often oppose such moves on the grounds it would increase their interest costs, and they view blocking the investment as a way to avoid population growth.

Why we don't trust councils as much

There are two other major hurdles to public acceptance for devolution of GST and income tax funding.

Firstly, many councils are poorly covered by local media, if at all, and the quality of governance on many councils is poor, creating the risks of corruption and incompetence unseen until it is too late. Without the collective responsibility of a cabinet-style process or rigidly enforced party discipline, councils often dissolve into public bickering and personality clashes that undermine public confidence and often stop development decisions.

Unlike a Prime Minister in our unicameral system with two major parties, a mayor cannot drive a cabinet decision through the 'Parliament' of a council vote. The end result, often, is that the council is captured by its officials and dominated by councillors and mayors focused on keeping rates reductions low.

The other result of the lack of cabinet confidentiality and party discipline is that the most sensitive matters go completely behind closed doors in 'commercial in confidence' sessions with poor oversight. The fact that the activities and decisions of many councils are barely reported on by their local media removes one of the elements of accountability. That is less the case at central Government levels.

There have been several recent examples of poor governance. The Kaipara District Council's wastewater system cost blowout eventually forced the Government to appoint commissioners and exposed poor oversight by the Auditor-General, while the Westland District Council selected a South Auckland cake decorator to build a $7 million water treatment system system at Franz Josef. That deal, which was never completed, is now being investigated by the Serious Fraud Office and the employee who awarded the contract has left the council.

Meanwhile, voting is dominated by older property owners who are asset rich but income poor. They often vote for candidates who pledge to keep rates increases and debt low, which restrains councils from increasing debt to pay for infrastructure needed for housing for new residents. Turnout in metropolitan areas in the 2016 council elections was just 39 percent of enrolled voters, while turnout in the general election last year was 79 percent.

For now, voters trust local government less than central government, and with good reason. But councils are right that growth of housing supply in particular will be strangled by debt-averse older voters without a change in the funding arrangements so that councils can use the tax revenues from growth to fund that growth.

So we are in a standoff where councils refuse to allow fast infrastructure growth by not increasing their debt and by using other tools such as very high development contributions and rural urban boundaries. The Government refuses to give councils control over GST and income taxes, and is also refusing to use its own balance sheet to fund the infrastructure needed to cope with the population growth shock of the last five years.

More faffing around

The standoff can either be resolved by the Government choosing to use its strong balance sheet to pay for and own the infrastructure, or by the Government allowing councils to either collect or receive GST and income tax revenues to help fund the infrastructure. The latter is unlikely for now given the levels of voter trust are higher for central Government than local government and central Government's mandate is stronger, given the stronger voter turnout.

Given neither resolution is likely in the short run and a Productivity Commission review and legislative process would drag on well into 2019 and 2020, the current standoff is unlikely to be resolved quickly. The tools needed for off-balance sheet borrowing are also yet to be legislated for, let alone arranged.

The end result is not nearly enough houses being built and continued pressure on land and house values. That is fine for property owning voters because they will continue to reap the benefits of tax-free and leveraged capital gains.

It is not fine for renters. But they don't matter in the eyes of local government politicians in particular, because they vote at much lower rates in both types of elections than property owners.

Until that dynamic changes, it's hard to see much changing in the landscape for local government funding.